US financial
services giant Morgan Stanley is to spin off its Discover card
division following months of pressure from shareholders, despite
Discover posting vastly improved financial results for the fourth
quarter and full year 2006. The spin-off will mean that Discover
will join MasterCard and Visa in becoming publicly traded
companies.

The news came as Morgan Stanley posted its
fourth-quarter and full-year financial results, in which it
reported a fall of 11 percent in profit in the fourth quarter, with
net income declining to $2.21 billion from £2.47 billion in the
year-ago period. Net revenue rose by 24 percent to $8.63 billion.
The bulk of Morgan Stanley’s profits came from its securities and
asset management business, on which the company is to focus
following Discover’s spin-off.

Discover, which has over 50 million cardholders in the US, and $50
billion of managed receivables, posted its best full-year results
ever for 2006. Net revenue was $4.3 billion and pre-tax profit was
$1.6 billion, a rise of 72 percent compared to the year-ago period.
However, the business has only recently begun to generate growth
and profits, and for some time Morgan Stanley has faced mounting
pressure to shed the card unit. In August 2005, Morgan Stanley CEO
John Mack reversed a previous decision by his predecessor Philip
Purcell to sell off Discover, arguing that Discover played a vital
role in supporting Morgan Stanley’s strength and was also a source
of earnings stability, but Mack has now confirmed that Discover
will be spun off in the third quarter of 2007, subject to
regulatory approval.

Mack said: “Given the record results and significant momentum both
in our securities business and our cards and payments business, we
have concluded, after our most recent strategic review, that they
can best execute their growth strategies as two stand-alone,
well-capitalised companies with independent boards of directors
focused on creating shareholder value. The spin-off will allow
Discover to continue building on its strong brand and significant
scale. We also believe the spin-off will unlock considerable value
for the shareholders of Morgan Stanley.”

Well positioned for success

Morgan Stanley said that Discover has considerably improved its
business fundamentals over the past year and is well positioned to
be a strong, stable, stand-alone company, particularly in the
expanding debit payment market in the US. Over the past 18 months
the company has signed agreements with a number of merchant
acquirers in order to increase acceptance among small and mid-sized
merchants in the US. It also launched a new Discover signature
debit card programme, and expanded its international presence with
acquisitions in the UK and strategic partnerships in China, Japan
and Central America.

Joe Dickerson, an analyst at Atlantic
Equities, said: “The Discover spin-off is good news for
shareholders. We believe this news is a significant positive for
investors and will help unlock considerable shareholder value.”

Financial performance

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